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How to prevent a recession we don’t have to have

08102019_Recession

How to prevent a recession we don’t have to have

Back in November 1990, with the Australian economy deep in the doldrums, Treasurer Paul Keating uttered his now famous remark that this was “a recession that Australia had to have”.  It was, remarkably, Australia’s last recession. Today, with our economy again looking into the abyss, I believe there is a simple measure the government could take to prevent the next one.

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Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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30 Comments

  1. Dear Roger,
    A couple of discrete thoughts on assumptions in economics, what is happening now and what is

    * The assumption in economics of the definition of a recession – two successive quarters of negative growth.

    * The assumption in economics that controlling interest rates affect the economy especially the behaviour of consumers. Increase interest rates, lower economics activity, particularly an overheated economy. The converse of decreasing interest rates should increase activity.

    * The assumption in the Australian economy that if you increase immigration or population in general should bring a rise in the price/value of housing.

    The actualities that counteract the assumptions:
    * Your paper describes that we are technically in recession, nothing to do with two successive quarters of negative growth.

    * Lowering interest rates have not necessarily increased economic activity. In your paper the number of building applications have decreased by 40%.

    * It leads to the remark or rather irony that even with increasing population generally by immigration, that the amount of housing required should NOT decrease demand for housing. In another article that author wrote on this website, population growth does not necessarily mean continually rising prices.

    Remarks or rhetorical statements:
    * Should the economics text books be rewritten to include exceptions to the rule on lowering and increasing interest rates and behaviour of consumers?

    * Should the assumption that increasing population does not necessarily result in increasing rates of either housing and/or price of real estate?

    * This may take time to measure, it is about the destruction of old jobs and the generation of new kinds of jobs. That is the kinds of jobs that exist now did not exist twenty or thirty years ago. For example internet web designers, social media marketing. There may well be jobs that don’t exist now that we don’t know what they are.

    On the other hand we are currently seeing jobs such as truck drivers and train drivers in the mining industry being replaced by autonomous vehicles or the ability of trucks and trains being controlled in real time in a ‘master control room’.

    I would like to challenge these “industry groups” on why they don’t have the fortitude to initiate new industries instead of becoming regional offices for multinational corporations.

    To illustrate, when the Sydney Harbour Bridge was constructed, ALL the steel used in the manufacturing of the bridge was imported into Australia from England by Dorman & Long. Yes there were ‘factories’ adjacent to the bridge’s construction site and yes the sandstone was local. BUT the steel was imported and cheaper than Australia would have made steel.

    That did not stop Essington Lewis, the chair of BHP to initiate a steel industry with foundries in Newcastle and Wollongong. This is in the face of cheaper imports of steel from Britain.

    There are many excuses or reasons which would amount to a thesis as to why industry and/or value-adding is not being initiated. Factors may include wages and the price of energy as a ‘barrier’ to entry of new kinds of industry. I keep the argument simple.

    The point is that if Essington Lewis had the vision and grunt to increase industrial activity in Australia. I don’t see any kind of Essington Lewis today. I also include visionaries Lawrence Hartnett who in World War II believed that with our scientific know-how through the CSIRO we could build gun sights which was regarded as impossible by others because the Germans built the best optics.

    Conclusion, we need more leadership at the top levels of government and industry so we can increase the diversity of our industrial portfolio. Remember portfolio theory by Mogdigliani and Miller of not putting all one’s eggs in one basket in investments. Why not industry?

    I could write more. In essence where are today’s Essington Lewises and Lawrence Hartnetts?

    Thank you
    Anthony

  2. Great choice of lyrics/song and artist/band Roger…M. Knopfler and Dire Straits are simply brilliant and one of the best is Telegraph Road…

  3. I do recall that the school funding was abused where the cost of the renovation/new building seemed to miraculously equal the sum of the funding cap. Same with the pink bats subsidisation. Human behaviour is hard to model. Tax cuts to low income earners would be the path I’d choose. But this government seems fixated on a surplus. Lord help us.

  4. Central banks around the world little ability to move economies forward. All they can do is cut interest rates. Money is cheap enough now and further cuts to interest rates are not helpful for increasing investment. All this does is cut income, and therefore spending/consumption, from those (e.g. retirees) relying on interest income. It also forces money into more risky investments (e.g. equities) pushing up their prices as investors clamour to get a return on their funds. Tax cuts for low to middle income earners (to create more spending) and infrastructure projects (to create employment) would be a good start for our government.

  5. Hi Roger
    As a very small business person, I find that wages plus compulsory superannuation are just too high a component of expenses. No wonder why every employer who can, is enthusiastically outsourcing/automating/offshore-ing.
    And the higher wages go, the bigger the hurdle for the unemployed to find a job.
    Unless you’re the Government…tunnel diggers of the world unite!
    Michael

  6. Funny that people think that the money spent on schools, “oh hang on” our kids future was a waste of money, or do their kids go to privileged private schools. By the way like mine.

    Singapore don’t have resources but they have a smart and well educated population and well funded education system, have a look at there GDP over the last 20 years!

    It was clever way to kick start the economy quickly, the liberals would have sat on their hands, as always, and we would certainly had a recession.

    If you want to talk about missed opportunities about spending on infrastructure go straight to theHoward and Costello era.

    Anyway this time it won’t be any different, the libs will sit on their hands and we will slip quietly into neverland.

  7. I’ve seen many such points being raised on how technology creates unemployment- doesn’t that mean any form of productivity gain (ability to output more with less) have the same effect? If so this argument is implying productivity itself may be a bad thing for the economy which I intuitively struggle with.

    Wouldn’t a similar challenge occurred during the industrial revolution? yet mankind seemed to come off immensely better off since then?

    If stimulating the economy is the goal I absolutely agree tax cuts to the low income would be far more effective except we are having a more high income friendly government where a lot of the lost tax revenue is simply not passed on.

    I agreed with some of the readers about govt spending on productive assets- school maintenance is fine if the asset genuinely needed replacing, otherwise we’d be no different than building ghost cities like in China during the GFC. If we have to spend on projects where returns do not stack up we should consider Rudd’s very fast rail project along the east coast, at least the demand may come after the infrastructure is built, and deliver benefits such as decentralise our population and ease capacity constraints.

    • The industrial revolution required more labour not less! This revolution requires less. Society may be better off in the very long run but the adjustment and transition can be nasty for a generation or two who experience it first hand. It could take decades for new business models and industries to grow up that support displaced workers.

      • It seems to me that the only way to get any economic growth now is to allow –or mandate a REAL rise in Real wages.
        Tax cuts?? –sure but this reduces government income so its automatically recovered in a million other ways.
        Real Wages ,by my reading of economic commentators , economists and historians have not actually risen in the last 40!!! (approx) years!
        I look at people who are doing the jobs I used to do in the 70s and 80s (from labouring , shearing, mining, all the way to the lower levels of commercial piloting) and see clearly that they are in no way better off financially (using disposable income as a gauge), and a lot worse off physically and mentally with 24/7 job rosters, “always on” (work)email lifestyle,casualisation of nearly everything, and job insecurity being the management style of choice.
        I guess this real wage rise idea is only possible by a strong government policy of wage increases for low and lower middle income earners in particular. It seems to me that it is disposable income that drives the economy into positive growth numbers, not the tax cuts of late–it would appear that many wage earners are –shock horror –actually using any recent tax relief to pay down their mortgage , and not spend it on more stuff–the stuff which would massage the inflation and growth figures upward.
        The wage increases would be immediately howled down by employers of all sizes reaching into their grab bag of worn out cliches informing us of the collapse of the economic universe as we know it, but it wont collapse. It never does.
        I was reading an article recently about Wal Mart , whose financials are the size of many small countries, that explained how after every (vociferously resisted) wage rise , their income and profit increased–simplistic , I know , but I can’t see any other change nowadays that would have the desired effect. Tax cuts for half an extra coffee a week no longer have any effect–actual real disposable income must rise and by a substantial amount to push us into the next growth phase —IMHO of course
        Paul

  8. Recent tax cuts seem to have had little impact on retail spending. To me the high high cost of real property is to blame. If you are like me (30 something, full time work) and are trying to enter the property market, you are desperately saving, earning near to no interest or putting it in the stock market (can’t live in the ASX, though), trying to catch up with the runaway property train. No spending there (and I am batting on a good wicket!). If you have bought recently, you are trying to get on top of an eyewateringly high mortgage. No spending either. The people who are well established, and whose property is now worth far in excess of what they paid, seem in great number to only invest in more real property. Why wouldn’t you keep investing in something that has given you such great returns? Plus your primary residence isn’t a pension asset, so why not upsize? Plus, nearing retirement I suspect the stock market starts to look more and more shakey (anyone retire in 2009?). To get us spending, either property has to correct or wages need to grow fast. Government won’t let the former happen (banks might collapse). Latter isn’t happening. Major Gov. infrastructure spending might help. Why not a few white elephants. But to me, the real thing that will drive wage inflation is the $1 trillion in super. As boomers start to draw on their super, the economy will get flush with cash, and there won’t be enough young workers to meet demand. Plumbers will start saying: “you need your bathroom fitted with handrails? You’re my 10th call this week. That will be $30,000. Too expensive? Sorry, can’t help you, I need to pay off my $10 million mortgage.”

  9. Spending on schools is a total waste of money, just as it was when Rudd built all those school halls that are now used for Zumba classes, crazy. If your going to blow billions on something, how about spending it on something that has an actual return on investment like water infrastructure, dams, hydro power, the Bradfield scheme is perfect, this country badly needs water infrastructure right across the country, and this kind of investment keeps on giving for centuries, and if we are going to continue the immigration based ponzi economy, we are going to need this even more.

    • Hey Andrew, the spending on the schools did arguably contribute to Australia avoiding a recession. But as I describe in the article there were sectors of the economy that did themselves enter a period of negative growth. I can recall among a friendship group of ‘soccer dads’ there were only two that were gainfully employed.

      • Yes of course spending on schools did help us avoiding a recession, but the whole point is that spending on productive assets like water infrastructure and cheap power infrastructure etc eventually pay their own way, and provide an economic dividends for decades and centuries in a lot of cases, and so why spend on something that’s not needed anyway, when we have obvious shortfalls in the areas I’ve mentioned, we need to stop spending for political reasons and start on productive projects, but we may have to remove ourselves from the control of the UN to achieve this.

  10. Careful Roger, you’ll give the world’s greatest Treasurer ideas. He recently said that for every 10% growth in house prices we get a 0.5% boost to GDP. That’s our strategy in a nutshell. Perhaps he can get low income households to leverage up with their tax cuts? Either way, he’s either very poorly advised or a complete lunatic.

  11. Thanks Roger. What are your thoughts regarding the government beginning a form of direct payment to the consumer in the form of a universal basic wage of some sort.

    As you say, automation is beginning to do the work of humans, thus removing jobs from the economy. This is only likely to increase in the future.
    IMPORTANTLY though, the same amount of work is being done, whether by human or robot. That is, GDP is still increasing with less jobs. As the robots dont require pay, maybe the “pay” for the work done by the robots should be distributed to the population (i.e. consumer) in the form of new money. This would help to retain the velocity of money in the economy, provide more income to business, grow the economy and ultimately provide more jobs.

    • Yes Greg, In a ‘hypothetical’ fully-automated world, where human labour is effectively redundant and the majority of the population do not work, an entirely new system would be required. For example, would governments, representing an unemployed majority, allow the robots to be owned by just a few families and corporations? If only a small fraction of the world owned the robots and everyone else is permanently unemployed, what would be the point of money if it only serves to provide liquidity to a few? A new system would necessarily have to be so broad as to render a universal basic wage inadequate or redundant itself.

  12. Carlos Cobelas
    :

    correction, 47%, plus budget repair levy, flood levy or whatever other levies they decide to gouge.

    • Agreed. I freely donated money to the 2010 Queensland flood appeal and the next thing I know, PM Gillard was slugging everyone in Australia for a flood levy.

      It was disgusting, especially since I had given what I could from my pocket and was now being forced to give for a second time, with no recognition of having done so previously. I promised myself “never again”, because I’ll obviously just get another levy the next time we have another natural disaster.

  13. Carlos Cobelas
    :

    a tax cut for people who pay little or no tax ?
    but not for those of us paying an outrageous 49% ( including medicare levy ) ?
    hmmm…………….

  14. What confuses me is as 3% of the workforce and highly remunerated jobs in construction cease how do these people afford mortgages and thus keep pushing real estate higher? Particularly as boomers and others cut spending in the economy having the spiral and contagion as you suggest. Are you sure that lower rates keep pushing prices up forever?

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